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An industry group representing the world’s largest financial institutions has said bondholders and shareholders should bear the cost of future bank failures, in its clearest guidance so far on the "too big to fail" debate.

The approach is controversial because it means regulators can force the cost of winding down the bank’s operations on to bondholders.

Even holders of senior debt would not be safe from losses in some circumstances, the IIF report said, although no investor should be worse off than they would have been in a traditional insolvency.

At a news conference, Credit Suisse chairman Urs Rohner, who worked on the report, said: “The fact that senior debt may be subject to bail-in as well is a giant leap forward in the industry’s understanding and acknowledgement of the issue.”

Bail-ins are one of several measures being considered by the international financial community to prevent future crashes. Others include increasing the amount of capital banks are required to hold against risky assets, and the introduction of contingent convertible bonds which convert into equity when a bank is under threat.

But the IIF argues when these efforts fail, even systemically important banks must be allowed to collapse without creating the kind of panic that sent the markets into turmoil following the failure of Lehman Brothers in 2008.

Its report, released yesterday, is the clearest guidance yet from the banking industry on how and when such an event should happen.

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It called for the G20 group of nations to work together on an international framework for orderly resolution of failed firms.

Deutsche Bank chief executive Josef Ackermann, who chairs the IIF board, said in a statement: “As we have declared before, we must build a cross-border resolution system that deals with the problems of ‘too big to fail’ so there will be no recourse to the taxpayer.”

Banks were forced to take billions of dollars in rescue money from governments around the world in the wake of Lehman’s collapse.

Supporters of bail-ins argue they allow the relevant authorities to wind down a bank’s trades and repay its debts without causing a "systemic shock" like the one caused by Lehman.

Crucially, it allows regulators to raise capital quickly before a firm's value is wiped out by insolvency.

Rohner said bail-ins could be implemented within the 50 hours between close of trading on Friday and the opening of the markets on Monday.

The Financial Stability Board, which advises the G20, has said it hopes to come up with resolution plans for the world’s largest banks by the end of this year, while the European Commission is also working on a European framework for orderly dismantling of financial institutions.

IIF managing director Charles Dallara conceded that it would not be easy to come up with a consensus on cross-border resolution plans.

“It will take substantial political will to create conditions for an effective application of the approaches we are highlighting today,“ he said.